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The Desert Enterprise
Running head: Case study for the desert enterprise.
The Desert Enterprise
In this case study I discuss about the consequence of change from partnership to incorporation and vice versa in terms of advantages and disadvantages. The conflicts arises when hiring a management team and its solution. Amount of profit generated by company and the benefits from company’s share price. Also, share price maximization and adherence to social and ethical standards.
1- Discuss the consequences of the proposed change from a partnership to a corporation in terms of advantages and disadvantages.
There are many significances of the suggested change from a partnership to a corporation because both partnership and corporation has its own advantages and disadvantages. In partnership one has to combine his financial resources with his partner. Establish terms with your business partner and sign specific business agreement to protect yourself in case of any disagreement or closure. In partnership both profit and loss has to be shared by both the partners as per define in business agreement.
Business agreement is developed in the assistance of lawyer which ensures that:
- You are shielding your securities.
- Terms of partnership are clearly established solving the concerns like profit division, dissolving the company, etc.
- Encounter lawful condition for restricted partnership.
While corporation is another type of business. It is done at regional or state level. When business is incorporated it means now it is legal entity and is disjointed from stockholders and proprietors.
Before incorporating it is better to seek legal advice as you will not be personally responsible for the arrears, obligations and acts of the organization.
In partnership method it is easy to begin partnership as both the partners has to share the cost for starting business. Share is divided equally either in management, profits and assets or in losses and liabilities and debts. It also has tax advantage as you and your partner has to pay tax jointly. But there is no lawful alteration concerning you and your business. You have to use your personal assets to minimize your business debts. There is a possibility of developing conflicts between you and your partner. You are accountable for the business decisions prepared by your partner as it effects you financially for example broken contracts.
Although in corporate method obligations are limited. You can transfer proprietorship. Corporation will have ongoing existence. It is easier to increase capital in such a business. Taxes are also low for an incorporated business. Despite that corporation is strictly structured. More costly than partnership or lone proprietorship. There is a chance of conflict between directors and shareholders. Residency of director can also create problem
It means that if we switch from one to another then maybe we face some problems and weakness at some points and on the other hand we also find some strength and profit in some points. For example in partnership there are more than one business owner while in corporation there is only one owner. It means that it is difficult to transfer ownership so we consider it as disadvantage. While in corporation it is advantage as it is easy to transfer ownership in it.
2- Describe potential agency conflicts that can arise when hiring a management team and suggest possible solutions.
When principal hires some agent to perform a task, it is establishing an agency relationship. But when the inducements of the negotiator do not align with those of the principal this results in agency conflicts.
There are two primary agency relationship:
- Managers and investors
- Managers and creditors
Shareholder versus Directors:
- Conflict between managers and investors/ stockholders arises when managers holds less than 100% of the company’s mutual stock.
- Sometimes manager may make some decisions that encounter with its best interests of the stockholder for example managers may advance their organizations to escape a takeover attempt to increase their personal job safety. Though, a takeover may be in the stockholders' finest interest.
Shareholders versus creditors:
Creditors decide to lend money to a firm centered on the perilousness of the company, its investment structure and its potential investment structure. These all issues will disturb the company's latent cash flow, which is a creditors' main concern.
Though, stockholder have control on such decisions along with the managers. As stockholders will make choices founded on their own best interests, a potential agency problem takes place between the stockholders and creditors. For example, managers could borrow money to repurchase shares to maximize shareholder return and decreases corporation shareholder’s base.
In this case Muhammad would like to hire a team with universal skills essential to implement his business visualization. May be he has to face difficulties regarding management team as this is totally new to the company and doesn’t know everything about company. Its mean that he should describe everything about company and then they also have to decide either they want to work with you or not and this will also results in wastage of time to complete his task. According to my point of view it is better to train your hired team and place scheme and roles for all and sundry should interest to encounter the company objectives.
3- Determine the amount of cash the company would generate from. Does it matter to the company whether the share price rises subsequent to the IPO? Who benefits from an increase in the company's share price?
The amount of cash the company is going to generate is 5 million issuing shares at BD4. 5 x 4=20M.
Its matters to the company whether if the share price is increased following to the IPO (initial public offering). Raising money requires high share price for any company. As that will allow them to issue less shares for amount they want. And if share price drops then they had to issue more share on the same amount thus when share price increases profit increases and when share price decreases profit decreases and thus loss takes place. Basically in IPO (initial public offering) or APO (additional public offering) condition investors propose a supplementary number of shares of equity in the business. These shares are all equal so when you buy a share from company it means you are buying some fraction of the company equivalent to that of anyone else who grips one stake of that company. The sum of all shares is equal to entire value of that company. Now all these shares are not for public. Mostly companies have the majority of the shares possessed by small number of managing interests. Now when company want to make money high share price at the time of issue is best case. As company make money when share selling is in its initial stage as when it moves towards third party then company will not get any profit. And also the worth of stock hinge on on its demand in market. Fewer share of the company available in market more the cost it consumes. So the stockholder and shareholders will be successful to get profit from an increase in the company’s share price at its primary sale. As after that it will move towards third party and the profit of that share goes to the seller not to the company.
4- Do you see a tradeoff between a company's focus on share price maximization and the adherence to social and ethical standards?
Business ethics are applied in order to guarantee that a definite required level of reliance exists between consumers and several forms of market members with dealings. For example, a portfolio manager has to give the same attention to the assortments of family members and small separate depositors. Such acts show that public is treated fairly as investors and shareholders are treated.
Yes I see a tradeoff between company’s focus on share price maximization and the adherence to social and ethical standards as in increase in the price of goods and services effects the social and ethical standards. That’s mean those customers who have limited earnings will affected by the company. As to increase company profit it is good to keep check and balance between company’s need and customer’s need. If you increase share price then off course it will not be affordable by low price investors or low income public. This will generate a negative effect on common public. To keep interact with common public it is our responsibility to understand their needs also.
So there are many ways to overcome such situations. You can introduce more such offers to satisfy low income consumers. So for this compromise takes place between company share price maximization and adherence to social and ethical standards.
complete guide to corporate finance. (n.d.). Retrieved from www.investopedia.com: http://www.investopedia.com/walkthrough/corporate-finance/1/agency-problem.aspx
stackexchange. (n.d.). Retrieved from personal finanace and money: http://money.stackexchange.com/questions/16491/how-does-a-high-share-price-benefit-a-company-when-it-is-raising-funds
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